U.S. debt has doubled over the last 25 years, implying potential effects for interest rates and both fiscal and monetary policy. Theory predicts that debt crowds out capital and increases rates. However, empirical estimates ignore how the composition and timing influence these effects. Using a life-cycle model, we show that while a 1pp increase in debt raises long-run interest rates by 1.4 bp regardless of the type of fiscal policy, the immediate response varies across policies. Debt-financed transfers are initially saved, dampening the immediate effect on interest rate, while debt-financed government consumption produces a larger immediate response. Simulating policy since the 2000s, we find that only half of the 170 bp eventual increase in interest rates has occurred, indicating that already accumulated debt will provide significant upward pressure on interest rates going forward. Thus, both the composition and timing of debt are important when evaluating the implications on interest rates.

A popular view is that fiscal policies are sustainable if r < g, e.g. if the interest rate on government bonds is lower than the rate of economic growth. This paper challenges this view. One reason is that if the interest rate is below the rate of growth currently, this may well be reversed somewhere in the future. Another reason is that even if r < g holds indefinitely, the level to which the public debt ratio will converge may, due to population ageing, be unsustainably high. Thirdly, accounting for the empirical fact that the interest rate on government bonds is increasing in the public debt ratio further increases the risk of fiscal unsustainability. Numerical simulations for four EU countries indicate that it is very unlikely that public debt ratios will stabilize at sustainable levels if current fiscal policies remain unchanged

Japan had experienced a deflationary economy for the past 20 years, and the lowest birth rate in the OECD. Here, we hypothesize that the reason lies in the modification of Domar’s rule to control debt; Japan conducts the financial policy using Domar’s condition with growth rate > interest rate (ρ > r), modified from Domar’s rule with growth rate > debt increasing rate (ρ > d). In this paper, we empirically analyze how ρ-d and ρ-r affect GDP growth and birth rate. Furthermore, we examine the optimal conditions for maintaining high GDP growth and birth rates.

We evaluate how federal tax policy changes transmit into budget dynamics across different levels of government under fiscal federalism. Our analysis focuses on the responses of federal, state, and municipal expenditures by using a series of exogenous tax shocks resultant from German tax reforms between 1992 and 2022. A proxy SVAR framework allows us to approach causal estimates by exploiting the distinction between exogenous policy shifts and endogenous fiscal responses. Our results show that increases in federal tax revenues lead to a short-run increase and a modest long-run increase in federal expenditures, while state expenditures temporarily decline and municipal responses remain imprecise. Overall, the results suggest that federal revenue shocks do not systematically translate into lasting expenditure adjustments at lower levels of government.